WASHINGTON — The Federal Deposit Insurance Corp. is answering industry calls to ease restrictions on high-rate deposits, but it remains to be seen if the proposed changes fully address community bankers' concerns.
The agency on Tuesday proposed to revise a regulation that has gone untouched since 2009. Community banks have long argued that the current rules make it harder for them to compete with larger institutions for funds.
The FDIC plan would establish a new method for calculating the cap on deposit rates for banks that are less than well-capitalized, based on a national average rate, which is intended to allow institutions to better respond to market fluctuations.
“The intent of this approach is to create a more balanced, reflective and dynamic rate cap to be better aligned with changes in markets and products and the interest rate environment,” said FDIC Chairman Jelena McWilliams.
The current rule sets the cap at 75 basis points above a national rate calculated as an average of what other banks pay. An institution's effect on that average is weighted by its number of branches.
Under the proposal, the national average would be weighted by an institution's market share. This would address small banks' concerns that banks with ample online deposits but few branches can skew the national rate.
"Weighting by deposits rather than by branches better reflects the marketplace in which some banks raise a high number of deposits online with a small branch network," McWilliams said.
The proposed cap would be the higher of two numbers: the national rate plus 75 basis points, or rates in the 95th percentile weighted by each bank's share of total domestic deposits.
Chris Cole, executive vice president and senior regulatory counsel at the Independent Community Bankers of America, said using market share instead of branches in the calculation is better than the current approach.
But he added that the FDIC could have gone even further. Cole noted that using market share still gives the big banks great influence over setting the national rate. A more balanced approach would be to give each institution an equal weight.
“We think it’s an improvement, but it’s not quite what we would like to see," he said.
“We wanted it based on actually per-bank rather than by branch because we said what happens is that the big four or all the large banks have all the branches right now," Cole added. "This disproportionately means you are getting rates only based on the big banks.
“That was a problem for community banks. They have kind of improved that by saying it should be based on market share rather than branches. … We would have preferred it were done on a per-bank basis.”
Cole added that community banks want the FDIC to factor credit union deposit rates into the calculation as well.
“We think [credit unions] should be incorporated immediately into the rate caps because they are effectively competing with community banks for deposits,” he said.
The current rule allows banks to argue that the national rate is not sufficient in a particular market. If the FDIC agrees, an institution can instead base its cap on a local prevailing rate. In that case, the limit is set at 75 basis points above that local rate.
In those cases, the proposal would establish a simplified process for less than well-capitalized banks to pay up to 90% of the highest rate for a particular deposit product in their local area.
Meanwhile, the FDIC is also attempting to address concerns that examiners are enforcing the interest rate caps at well-capitalized institutions. The agency said it has revised it examination manual to clarify that "rate caps apply only to institutions that are less than well capitalized."
“We appreciate the FDIC’s recognition that the National Rate Cap was never intended to be applied to well-capitalized banks, and for updating its supervisory and examination manual to reflect that fact," American Bankers Association CEO Rob Nichols said in a statement. "We also look forward to working with the FDIC to further improve the National Rate Cap so that it does not set or interfere with market rates, and provides banks flexibility to meet the needs of their depositors.”
The proposal also seeks comments on alternative approaches to setting the national rate caps. The public will have to 60 days to comment from when the proposal is published in the Federal Register.
The FDIC said it plans to issue another proposal that addresses policy issues related to brokered deposits at a later date.
